Annual Report 2005 Warsaw, 2006 Leszek Balcerowicz President of the National Bank of Poland The mission of the National Bank of Poland is to oversee the value of the Polish currency, provide for a stable and safe banking system and manage the Polish official foreign exchange reserves. Its mission also includes scientific research and the economic education of the general public. The NBP carries out the tasks entailed by its membership in the European System of Central Banks and takes steps aimed at Poland’s adoption of the single European currency. In accomplishing these tasks in 2005, the NBP acted on the basis of the Monetary Policy Strategy beyond 2003, Monetary Policy Guidelines for the Year 2005 and the Plan of Activity for 2004–2006. In 2005, the Monetary Policy Council continued its measures to anchor inflation and inflation expectations at a low level, thus creating the conditions necessary for fast and sustainable economic growth and for Poland’s accession to the euro area.. In 2005, the reference interest rate of the central bank was reduced from 6.5% to 4.5%. At the end of 2005, inflation dropped below 1%, diverging from the inflation target which, since January 2004, has been 2.5%, with a fluctuation band of ±1 percentage point, and is of a continuous character. To a significant degree, this divergence was the result of one-off factors, primarily of a drop in fuel and food prices. Inflation throughout the year was restrained by the strong nominal exchange rate of the zloty. The banking sector is a main part of the Polish financial system and a stable and thriving financial system enhances the development of the economy and enables the income of the public to increase on a sustainable basis. In looking after the stability and safety of the banking system, the National Bank of Poland protects the value of bank deposits. In the years 2000–2005, banks’ capital base went up by 48%. Banks’ solvency ratio stood at 14.6% at the end of 2005, considerably exceeding the minimum 8% level. The quality of their loan portfolios improved significantly – the ratio of non-performing loans to total loans went down from 10.1% in 2004 to 7.4% in 2005. The ratio of financial results to banks’ assets and capital as well as efficiency, measured in terms of revenue/cost ratio, have also been improving systematically. In 2005, Polish banking supervision continued intensive preparations to implement the New Capital Accord, which will become effective as of 1 January 2007. The third core area of NBP’s activities is the management of the Polish official foreign exchange reserves. The reserves support the stability of the zloty exchange rate and reduce the risk, as perceived by financial markets, of investing in Polish currency. Adequate foreign exchange reserves increase Poland’s financial credibility and enable the state and private entities to take loans denominated in foreign currencies that bear a relatively lower interest rate. In its management of reserves, the NBP observes two principles: to ensure the safety of invested funds and maintain their liquidity at an appropriate level. Acting in keeping with these guidelines, the NBP aimed to generate a maximum return on investment. Income from foreign exchange reserves in 2005 made it possible to transfer the amount of PLN 1.1 billion to the central budget. In 2005, the focus of NBP research was on current analyses of the effectiveness of monetary policy and inflation processes, economic conditions, the economic situation in the corporate sector, households, and on the labour market. Following the example of other central banks in the world, the National Bank of Poland continued its Programme of Economic Education, which is aimed at enhancing the general public’s knowledge of the central bank and the banking system, among other subjects. In 2005, the Economic Education Portal was further developed and the number of its users increased almost three-fold, to over 1.5 million. The NBP also organised contests on economic issues for school and university students, as well as journalists. As part of an information campaign, the NBP organized Open Door Days at the bank’s headquarters and regional branches, during which over 30,000 persons visited the NBP. 2005 was the second year of Poland’s membership in the European Union. NBP representatives participated in the work of the ECB Governing Council, the ECOFIN Council, the EU Council, and European Commission committees and work teams. In 2005, the NBP started to transfer data related to the consolidated balance sheets of financial monetary institutions and interest rate statistics to the ECB. In 2005, steps were also taken to integrate the newly- created euro settlement infrastructure with systems that are in place in the European Union, i.e., TARGET, STEP2, and EURO1. As part of the collaboration with the ECB in counteracting euro counterfeiting, the NBP joined the Counterfeit Monitoring System. In 2005, the National Bank of Poland continued internal reforms aimed at improving the efficiency and security of operations, and the reduction of general expense. The Risk Management System introduced in 2004 was further developed and the IT infrastructure was modernised. As a result of the rationalisation measures implemented in 2002–2005, the number of employees at the NBP decreased by a total of 27%. The process of organisational and personnel changes in the Bank’s regional branches was also completed in 2005. A stable currency, a healthy banking system, sufficiently large and professionally managed foreign exchange reserves are the pre-conditions for a stable, fast and sustainable development of the economy. By overseeing the above, the National Bank of Poland makes a significant contribution to the process of building a healthy free-market economy which, in turn, leads to a systematic improvement in the living standards of the entire society. President of the National Bank of Poland Leszek Balcerowicz Contents TABLE OF CONTENTS THE MONETARY POLICY COUNCIL..................................................................10 MANAGEMENT BOARD OF THE NATIONAL BANK OF POLAND ...................11 ORGANISATION CHART OF THE NATIONAL BANK OF POLAND ...................12 SUMMARY.........................................................................................................13 1. GOVERNING BODIES OF THE NATIONAL BANK OF POLAND ....................19 1.1. President of the National Bank of Poland..............................................................20 1.2. Monetary Policy Council...........................................................................................20 1.3. Management Board of the National Bank of Poland............................................21 2. MONETARY POLICY......................................................................................25 2.1. Monetary Policy Strategy in 2005............................................................................26 2.2. Monetary Policy in 2005...........................................................................................28 2.3. Monetary Policy Instruments ...................................................................................32 2.3.1. Excess liquidity of the banking sector .......................................................................32 2.3.2. Monetary Policy Instruments.....................................................................................32 2.3.2.1. Interest rate...........................................................................................................32 2.3.2.2. Open market operations........................................................................................34 2.3.2.3. Required reserve....................................................................................................35 2.3.2.4. Standing facilities ..................................................................................................36 2.3.2.5. Other operations ...................................................................................................36 3. BANKING SUPERVISION............................................................................... 37 3.1 Licensing.................................................................................................................... 38 3.1.1. Establishment of banks............................................................................................ 38 3.1.2. Safe of a banking enterprise or of its organised part ................................................39 3.1.3. Changes in the banks’ ownership structure............................................................. 39 3.1.4. Changes in the composition of banks’ management boards ................................... 39 3.1.5. Amendments to banks’ statutes .............................................................................. 39 3.1.6. Pursuance of activity via branch or in the form of cross-border activity.................... 40 3.1.7. Establishment and operations of representative offices of foreign banks and credit institutions.............................................................................................. 40 3.1.8. Other activities related to licensing operations......................................................... 40 3.2. Regulatory tasks ...................................................................................................... 41 3.2.1. Draft acts ...............................................................................................................